David Koch, the former finance journalist who parlayed his knowledge of stocks and shares into breakfast TV stardom, is at the forefront of the next wave of Australian investment in US hedge funds.

Kochie is the new chairman of a listed investment company, Global Wealth Partners (GWP), which is part of the global rush by investors to lock in absolute returns amid nervousness about equity markets.

GWP will invest in four hedge funds including Manikay Partners, the New York-based hedge fund run by three Australians, former UBS executives Shane Finemore and Russell Aboud and former JPMorgan trading guru Steve Paridis.

Finemore and Aboud hit the headlines last year when they resigned from the ASX board of directors after a fine was imposed on Manikay by the US Securities and Exchange Commission because of technical breaches of reporting short sales.

Manikay, which has $US1.7 billion ($1.8 billion) under management, has achieved an annualised net return since inception in 2008 of about 12.3 per cent

Three other hedge funds in the portfolio are James Litinsky’s JHL Capital, Stephen Errico’s Locust Wood Capital Adviser and Orange Capital, which was founded by ­Daniel Lewis and Russell Hoffman.

Alternative investment strategies are booming around the world in both retail mutual funds and in wholesale markets because of the general consensus that they help diversify risks.

Low weighting towards alternatives

In Australia, the weighting towards alternatives in institutional portfolios is low relative to those overseas. Retail investors tend to have little if any exposure to alternatives such as long/short equity funds.

The latest data on self-managed super funds from the Australian Taxation Office shows a weighting towards Australian investments of about 71 per cent, cash 28 per cent and overseas investments of 1 per cent.

That bias towards domestic investments is understandable given the relatively high yield available in Australian bank stocks and industrial shares. Local equity investors have the advantage of dividend imputation, which ratchets up the post-tax yield.

The country’s biggest investor, the $100 billion Future Fund, has invested about $13.29 billion in alternatives or about 13.6 per cent of the total investment portfolio.

The Future Fund does not include private equity in its definition of alternatives. It has a further $7.77 billion invested in that area.

Global asset manager, Blackstone recently launched a mutual fund in the US which will allow retail investors to put money into a private equity fund.

Alternatives have usually been in vogue following a crisis. Blackstone’s Byron Wien said in a note to clients this month that following the dot com bubble in 2000, the weighting in alternatives rose from 24 per cent to 53 per cent.

Correlated with markets movements

However, the global financial crisis taught those who fell in love with absolute return funds that they were actually correlated with movements in markets.

The problem for hedge funds was that they became a source of liquidity for leveraged institutional investors hit by demands from banks for repayment of borrowings.

In Australia, Kochie will be pushing the GWP investment as a vehicle for asset diversification. The minimum investment will be $2,500. Kochie’s involvement in GWP marks a return to the listed public company market. His early career involved several entrepreneurial publishing businesses.

However, his last public company directorship at Palamedia was not covered in glory. In 2005, the company admitted its strategy of becoming an integrated finance media publishing business had failed and all assets were sold to stabilise the business.

Kochie deserves credit for having a go. He published many quality magazines but the company could not generate the returns to pay its debts. At GWP, Kochie will earn about $125,000 a year for filling the role of chairman, according to documents circulating among sophisticated investors, brokers and financial advisers. It is believed Kochie will donate his salary to charity.

A national roadshow seeking to raise $300 million is being led by boutique investment bank Moelis. Moelis Australia Asset Management will manage GWP.

GWP will gain a lot of market credibility with the appointment of Warwick Negus as an independent director. Negus is former chief executive of funds management company, 452 Capital, which was bought by the Commonwealth Bank of Australia.

Negus chairman of a Singapore-based hedge fund Tantallon, a director of Terrace Tower Holdings and national vice-president of the Financial Services Institute of Australia. The other members of the GWP board are independent director Alexandra Priestley, Moelis managing director Andrew Pridham and Moelis capital markets specialist Amelia Salter.

Bad timing for Rio

It is unfortunate for the corporate governance industry that Rio Tinto revealed it lost $US3.9 billion in Mozambique on the same day Peter Swan at the University of NSW claimed independent board directors had destroyed up to $50 billion in shareholder value over the past decade.

Based on the fact that Rio has a majority of independent directors, Swan’s losses attributable to independents has jumped significantly. Rio’s management certainly paid the price for the foray into coal mining in Mozambique with the purchase of Riversdale Mining. The chief executive Tom Albanese was dumped, as was the head of energy and strategy Doug Ritchie. The chairman who presided over the Riversdale deal and the $30 billion Alcan disaster, Paul Skinner, also left. He was replaced by Jan du Plessis.

Rio has an exemplary board of directors but it is not clear that they suffered as much as shareholders would have liked.

This is where Swan’s document comes in handy by reminding investors that Australia’s traditional form of corporate governance has weaknesses that do not occur in other jurisdictions. As revealed by James Eyers in The Australian Financial Review Swan’s research finds ­non-independent directors make better acquisition decisions, increase the proportion of incentives in chief executive pay, and raise dividend payouts.

He says that directors who are significant shareholders reduce CEO pay, increase the sensitivity of CEO turnover to performance and raise the firm’s level of performance. In contrast, independent directors have negligible skin in the game, which “diminishes any intrinsic incentive to monitor that the independent director may possess”.

However, there are several weaknesses in Swan’s arguments. He often uses examples from the US, where boards are appointed by chief executives or executive chairmen, to illustrate the weaknesses of the Australian system, which is totally different.

At least he is willing to recognise that the ASX Corporate Governance Principles are not prescriptive. They allow companies to print in their annual report the “if not, why not” explanation. Swan’s findings were not well received at the ASX, which argues that “globally, most investor groups strongly and consistently endorse the position that boards should be comprised of a majority of independent directors.”

“They can be assumed to be rational investors acting in their own best interests and so, plainly, they must see value in the role performed by independent directors that is not being identified in the statistical measures Professor Swan uses in his study.”

However, it is worth noting that some of the most successful listed investment companies in Australia do not have a majority of independent directors. In other words the fund managers themselves do not see the value in filing a room with people who could not know their business better than them.

Succession planning success

Succession planning is the task of every board of directors. In its broadest sense it means finding the chief executive, usually from the existing management ranks, and finding a new chairman. The changing of the guard at Brambles is a text book example of how it should be done. Outgoing chairman Graham Kraehe did a superb job of presenting his fellow board members with a list of potential candidates for chairman. Stephen Johns has the international experience from his days at Westfield to carrying on the good work at a company that has successfully taken on the logistics world and won.